Morgan Stanley sees limited prospects for fixed-income rebound

[NEW YORK] Morgan Stanley pared its fixed-income trading operation last quarter after concluding the outlook for the business is poor, though job cuts are "effectively done," Chief Financial Officer Jonathan Pruzan said.

"That revenue pool for the industry has been shrinking, it's continued to shrink, and we came to the conclusion that we thought the prospects for that revenue pool rebounding anytime soon was very limited," Pruzan said Tuesday in an interview.

Chief Executive Officer James Gorman, 57, is attempting to strike the right balance in Morgan Stanley's bond-trading business amid the industry's years-long slide in revenue. The firm said last month that it was taking a US$150 million severance charge as it pared the business. The cuts affected 1,200 employees, including about a quarter of its fixed-income trading staff, a person briefed on the matter said.

"The business itself was really staffed for a better operating environment, a better trading environment," Pruzan said in the interview. "We took out some excess capacity, but we also closed down some desks that were really not strategic to the firm."

Fixed-income trading revenue fell 8.2 per cent to US$550 million in the fourth quarter, excluding one-time items, a steeper drop than many analysts had estimated and the second- lowest since the financial crisis. David Konrad, an analyst at Macquarie Securities USA Inc, had projected revenue of US$580 million and Matt Burnell of Wells Fargo & Co estimated US$607 million.

The firm last week named Sam Kellie-Smith, who helped Morgan Stanley become Wall Street's top equities-trading shop by revenue, to revamp fixed income - a capital-intensive area that several rivals have been retreating from in the face of tougher rules. Kellie-Smith is the sixth manager to take on that challenge in the past seven years.

Risk-weighted assets in fixed income will drop to less than US$110 billion from US$136 billion at the end of 2015, the firm said in a presentation on its website Tuesday. A year ago, the target was US$180 billion for the end of last year.

BLOOMBERG